Fundamental Analysis of Vornado Realty Trust Preferred Shares
A fundamental analysis of Vornado Realty Trust (VNO) preferred shares is different from an analysis of its common stock. Preferred shares, often identified with a series letter (e.g., VNO-A, VNO-B), are a hybrid security that has characteristics of both a stock and a bond. They are not a direct ownership stake in the company's future growth; instead, they represent a claim on a portion of the company's assets and earnings, with a priority over common stock. Therefore, the analysis focuses on the safety and predictability of its dividend and the stability of the underlying company.
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| Fundamental Analysis of Vornado Realty Trust Preferred Shares |
Key Characteristics of Preferred Shares
To understand the fundamental analysis of VNO's preferred stock, you must know its unique features:
Fixed Dividend: The most important feature is the fixed, typically quarterly, dividend. Unlike common stock dividends, which can fluctuate, the preferred dividend is set at a specific rate. This makes preferred shares an income-generating investment similar to a bond.
Dividend Priority: Preferred shareholders have a higher claim on the company's earnings than common shareholders. If Vornado were to face financial difficulties and had to cut or suspend its dividend, the preferred dividend must be paid in full before any dividend can be paid to common shareholders.
Liquidation Preference: In the event of a company's liquidation, preferred shareholders have a claim on the company's assets that is senior to common shareholders. This provides a layer of capital protection.
No Voting Rights: Preferred shareholders generally do not have voting rights in company matters. This is a key trade-off for their priority in dividends and liquidation.
Par Value and Callability: Preferred shares are typically issued with a par value (e.g., $25 per share). The company also usually has the right to "call," or redeem, the shares at this par value after a certain date. This caps the upside of the stock.
Fundamental Analysis Focus
Given these characteristics, the fundamental analysis of VNO's preferred shares should focus on these aspects:
Dividend Safety and Payout: The primary question is whether the company can sustain its preferred dividend payments. A good way to assess this is by looking at Vornado's Funds From Operations (FFO). Unlike common stock, where FFO is used to assess growth, for preferred stock, FFO must be comfortably high enough to cover both the preferred and common dividends. A wide coverage ratio indicates a safer dividend.
Creditworthiness of the Company: Since preferred shares are a fixed-income-like security, the creditworthiness of Vornado Realty Trust itself is paramount. You should analyze Vornado's overall financial health, including its debt-to-equity ratio, its interest coverage ratio, and its ability to refinance its debt. A strong balance sheet and a well-managed portfolio are key indicators of a low-risk preferred stock.
Interest Rate Environment: Preferred shares are sensitive to changes in interest rates. When interest rates rise, newly issued preferred shares or bonds will offer a higher yield, making existing, lower-yielding preferred shares less attractive. This can cause the price of VNO's preferred shares to decline. Conversely, falling interest rates can make preferred shares more valuable.
Call Risk: Most preferred shares are callable. If Vornado's preferred shares are trading above their par value and interest rates have fallen, the company may choose to "call" them, forcing investors to sell their shares at the par value. This is a significant risk that caps the potential upside of the investment.
Conclusion and Investor Profile
The fundamental analysis of Vornado Realty Trust's preferred shares leads to a conclusion that they are an investment for a specific type of investor. They are not for those seeking capital appreciation or exposure to the full growth potential of Vornado's real estate portfolio.
Instead, they are suitable for income-oriented investors who prioritize a predictable and relatively safe stream of dividends. They are a good fit for a fixed-income portfolio, offering a higher yield than many corporate bonds but with the added risk of being a stock. The investment thesis is based on the continued financial stability of Vornado and its ability to consistently pay its preferred dividend, regardless of the ups and downs of its common stock price.
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